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Backlash Against Densification Prompts Changes to Office Properties

Oct 18, 2017

Companies in open-plan offices with minimal space per employee are discovering that densification has some downsides, such as distractions and a lack of privacy. As a result, today’s tenants, are seeking a different kind of model. What exactly is this model? Some of the leading players in the industry offered their perspectives during a panel discussion at the Global Leaders in Real Estate Summit.

The event, which was co-sponsored by iGlobal Forum and EisnerAmper, was held at the Lotte New York Palace on September 28. Andrew Scandalios, senior managing director of HFF LP, served as the moderator for the panel, entitled, “Opportunities in Office Properties: Analyzing Job Data to Find the Right Market.” Joining him on stage were panelists Norman Sturner, founder & CEO, MHP Real Estate Services; Michael Maturo, president of RXR Realty; David Gilbert, chief executive officer and chief investment officer of Clarion Partners, Meir Cohen, CEO of Cohen Equities; and Cynthia Foster, president, national office services, at Colliers International.

Foster talked about “a fundamental shift in the way office users use their space,” which she said is “pretty consistent across the country.” Where companies once sought 20-25% less space, they now prefer no reduction. What they seek instead is more privacy, along with food, wellness, space for collaboration, space that contributes to productivity, and good technology. Those are, she reported, “the big six” in office needs.

Yet the desired model is still in transition. “Nobody’s gotten it quite right yet,” said Foster. Maturo agreed with Foster’s assessment. “Space design is constantly changing,” he said. Millennials themselves, who once inspired densification, are now contributing to a backlash against it. Why? Maturo explained that they are getting married and starting families. “People need to have a place to call their husband or wife,” noting that many millennials are making these calls in office hallways.

There is no doubt, however, that the emerging model is largely based on expanded on-site amenities. In one of RXR’s buildings, for example, there are bike spaces, dog spaces, and loading bins that enable food-truck deliveries up to each floor.
An MHP building features a 40,000-square-foot plaza and a café on the plaza level. This creates a lesser need for lunchroom space, noted Sturner, who added that the plaza has served as a venue for evening parties of 400 to 500 people. Also in the building are a gym, a flywheel studio, and a conference center that seats 250.

Tenants are also seeking amenities that attract visits from clients, said Foster, who offered a hypothetical example of a tenant allowing a client to borrow a large conference room.

But amenities aren’t the be-all-and-end-all. Although Cohen concurs that amenities are extremely important to tenants today, he also contends that a “sexy location” with no amenities will nevertheless be in demand. Foster shares this view, but she emphasized that the farther you move away from the urban centers, the more critical amenities are.

Suburbs, at least these days, are clearly not perceived as “sexy.” Foster has seen little demand for offices in the suburbs. This comes as no surprise to Cohen, who suggested that if you buy or build something in a suburb without a tenant in place, you face a strong chance of failure.

Cohen’s firm does buy properties in the suburbs, but only if the properties are “next to the train station, only 20 minutes from the central business district.” Such convenience is an essential consideration, especially because, as Gilbert observed, there is competition for talent: “Employers will go wherever they have to go to find young people.”

The draw of the talent pool is why New York City, in particular, is “very well positioned,” in the words of Maturo, and why companies like Spotify (an RXR tenant) and Amazon are expanding their presence here.

Are New York City’s advantages strong enough to persuade Amazon to establish its second headquarters here? Cohen thinks that Manhattan is a likely choice, which is good news for Sturner, who recently sent off an RFP for the borough. Gilbert believes Dallas is a leading contender. And Maturo thinks Atlanta has a good shot, but confessed: “My heart will say Brooklyn.”

Bidders cannot ignore the role of business incentives in Amazon’s decision. Foster noted the competitive advantages of North Carolina, which has some of the richest incentive packages in the country, and Dallas, which also offers strong incentives. Nevertheless, the importance of the talent pool cannot be underestimated. Boston and New York, Foster noted, boast excellent universities and employee stock.

As the bidding proceeds, one thing is certain: The savviest landlords will come up with creative plans for accommodating Amazon in their cities and buildings. Such landlords, several of whom were represented on the panel, have already demonstrated their ability to adapt their office properties to the rapidly changing needs of businesses. There is little doubt that they’ll be able to do so on an Amazonian scale.

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